Maybe “Old Rusty” finally kicked the bucket. Or maybe you’ve moved out of the city and are looking for your first car. Whatever the reason, if you’re in the market for a new car, there are tons of ways to get a new set of wheels. It’s no secret that paying cash and buying a used vehicle is typically the more financially savvy move. But does it ever make sense to lease a car?
At first glance, leasing can be an attractive option for those looking for a new ride. It allows you to drive a newer model car and have lower monthly payments than if you were to finance it. But, leasing has some significant downsides. In this post, we’re going to cover all the ins and outs, so you can determine whether leasing a car might make sense for you.
Pros and Cons of Leasing a Car
Leasing a car is sort of like renting an apartment. When you rent an apartment, you and your landlord agree on a set amount of time during which you will live in that space, and come up with a list of terms by which you will live. There are penalties for breaking the lease and fees for breaking any agreed terms.
When you lease a car, you essentially rent it from the dealership for an agreed amount of time in exchange for monthly payments. The dealership sets certain terms which can dictate things like how many miles the car can be driven, monthly payment amounts, and how penalties are calculated for damage or going over allotted mileage. While some lease items are negotiable, many are not.
Upsides of Leasing a Car
While it’s usually not the most frugal move, leasing a car does have some benefits that could make it a good choice for some folks.
1. Lower monthly payments (vs. financing)
Probably the most appealing thing about leasing is the lower monthly payments as compared to financing a new car. Right now the average lease payment for new vehicles is about ~$600 per month, compared to the average car loan payment, which is ~$740 each month.
Here’s a chart via Experian’s latest automotive financing study. It shows the average monthly payment on the top leased model cars:
As you can see, leasing some car models allows you to cut monthly payments almost in half, which can be very appealing at first glance.
Our opinion? BOTH of these average monthly payments are probably higher than most folks should be paying for transportation. 😬
2. You get to drive a newer model car
Another benefit of leasing a car is that you’ll be able to drive newer models. And, if you continue to lease new cars in succession, you’ll always get to enjoy riding around with the latest features and safety updates.
For a lot of folks, this can mean less time spent at the mechanic shop. And it can mean less stress because you’re always driving a car in its prime. It’s difficult to put a price on peace of mind, but ultimately you still have some risks of breakdowns, accidents, recalls, etc. Remember you’ll still need to perform routine maintenance on any vehicle, like regular oil changes, etc. And those costs will need to be paid for out of pocket.
Another cool thing about leasing a new car is that when maintenance issues rear their ugly heads, your ride will still be covered by the manufacturer’s warranty. This means most repairs won’t cost you a dime (obviously not self-caused damage from an at-fault accident).
3. Renter-like Flexibility
Do you know the age-old advice about renting an apartment in your desired neighborhood before buying so you can see if you like the area? On a smaller scale, leasing allows you to do the same with cars.
Not sure you want a minivan long-term? Lease one for 36 months to see if it fits your family. Starting a job that might increase your commute? Lease a hybrid or electric car for a few years and see if your job requirements change.
Basically, if you’re not sure what you’re looking for in a car, leasing lets you try a car type or model for a few years. Leases come with shorter terms, typically 24 or 36 months. So if your driving needs change (or simply your tastes) you won’t be saddled to that car for too long. And you’ll be able to switch shortly to a car that better suits your long-term needs.
4. Don’t have to worry about selling it
When a car lease is up, you can hand it right back to the dealer. There’s never a worry about selling or getting rid of the car after a lease. This saves you the hassle of listing the car, sifting through potential lowball candidates, getting the car inspected transferring the title, etc.
At the end of a lease, just drop your car back off at the dealership and pay any required fees. Be aware that, depending on your terms, the leasing company may require an inspection to ensure there isn’t excessive wear and tear on the vehicle.
5. Possible Buyout Options
If you end up falling in love with your car (metaphorically speaking- not like that guy from My Strange Addiction), you won’t have to say any tearful goodbyes. Typically, when your lease is up, you’ll have the option to buy the car outright.
The buyout price is usually listed in your lease contract upfront, so you’ll know how much it will cost to purchase that car ahead of time. This number is based on the car’s residual value, i.e. the value of the car minus the depreciation that occurs during your lease period.
It’s important to note though – buying out your lease can be expensive. It often costs more than if you had just purchased that vehicle outright. Remember that if your lease only lasts 2-3 years, your car could still have a very high residual value, meaning you will once again be confronted with the reality of high monthly payments to buy out that car.
However, in some cases, buying your car after leasing it can be your best option. Especially if you owe hefty fees for excess mileage and wear and tear. Whether or not this will make sense for you will depend heavily on those factors and how much you owe. You’ll want to crunch the numbers to evaluate your options.
Downsides of Leasing
OK before you run off and lease a new BMW i8, we need to go through all the downsides. Here are some aspects of leasing that you won’t like much…
1. Fees (many are hidden!)
You’ve seen the car ads with huge bold text… “Drive away today for just $599 a month!…”. But in the corner of the advertisement in tiny almost unreadable text, it continues “after a $5,999 deposit, taxes, title, and dealership fees due at signing”
Even though leases may have lower monthly costs, it doesn’t mean you’ll get to just drive off into the sunset scott-free. Leasing a car does come with some considerable upfront costs. Just like financing a car, you’ll need to put money down upfront, as well as pay any acquisition fees and your first month’s payment. Leasing a car can come with a bunch of hidden junk fees.
2. You don’t own the car at all
With a car lease, you make payments akin to rent and will be left with NOTHING at the end of the agreed-upon period. Again, it’s just like renting a house – there is zero equity for renters. This can be upsetting to think about because all those monthly payments haven’t actually “bought” you anything to keep.
Sure, financing a car comes with not-so-fun monthly loan payments too. But at the end of that loan period, you own a car! And when it’s paid off fully, you can enjoy years of not having payments, allowing you to save and invest that money instead.
Many people who lease fall into a recurring cycle, leasing a new car every few years and never actually owning a vehicle. They will always have a monthly car payment, and won’t be able to enjoy the financial benefits of driving a paid-off car.
3. No modifications
If you’re a gearhead, a lease might not be the best option because it will likely prohibit aftermarket modifications. You can kiss your dreams of tinted windows or an upgraded stereo goodbye. While you can likely make smaller mods to your car, like changing the matts or adding a bike rack that can be removed later on, it’s important to consult your lease agreement before making any changes to the condition of the vehicle.
4. Fees for damage
Want to know my favorite part of purchasing used cars? There’s so much less pressure to keep it scratch-free. Sure, you want to make an effort to keep it nice, but when someone’s abandoned shopping cart rolls into your used 2013 Mazda, it’s a lot easier to keep your cool than if it smacks into your sparkling new Tesla.
Getting a dent on your lease can also be a stressful situation because you’ll be on the hook for any damage deemed excessive by the leasing company. Get too many dings, dents, and scratches on your vehicle, and you could be hit with some hefty damage fees.
5. Limited miles
One of the biggest downsides of leasing a car is its limited mileage parameters. When you sign a lease, you agree to drive under a specific amount of miles per year. For most leases, this mileage range is between 10-15,000 miles per year.
If you live close to work or don’t drive much, this may not be a big deal. However, if you commute to work, this could completely rule out a lease for you. For example, if you commute 30 miles each way to work, 5 times a week, 50 weeks a year, you’ll already be sitting at 15,000 miles just to get to and from work. Forget about that week-long road trip you were planning!
Going over this mileage limit means paying excess fees. And they ain’t cheap! Most leases can charge you between 15-30 cents per mile. That means that if you’re 5,000 miles over your limit, you’ll need to fork over between $750-1,500 extra. Daaang!
While some dealerships allow you to negotiate mileage when signing your lease agreement, others are more strict. You’ll want to make sure you carefully calculate the amount of miles you anticipate driving each year, and whether the extra cost is worth it. In this case, it may increase your monthly lease payment to the point where it makes more sense to just finance a vehicle.
6. Tough to exit your lease early
So you finally found the perfect used car of your dreams and you’re ready to commit to it. Can you get out of your lease early?
Well yes, but it will cost you. If you decide to break your lease early, you’ll need to pay a lease termination fee, which can sometimes cost more than if you were to just continue making the monthly payments. Alternatively, you’ll need to roll your monthly payments into a new lease (increasing your monthly obligations) or find someone to take over your lease (which can prove difficult!). Either way, you’ll need to consult your lease agreement to see what options are available for you.
On the flip side, when you own a car, you’re free to sell it whenever you please.
So, does leasing a car ever make sense?
In 2023, about 1 out of every 5 new vehicles was leased instead of purchased in the USA. There are some cases where leasing makes sense, and people do it regularly.
That’s particularly true for new electric vehicles. Given that technology is advancing rapidly in the EV space, it’s hard to know how long you will keep a new electric vehicle. It can make sense to lease one for 2-3 years and then make a purchase after the term has ended.
Financially, leases are appealing in the short term, because the car lease payments + down payment + all fees usually equal fewer dollars than financing a car purchase. But, since you don’t own the vehicle at the end of the lease term, there is no long term financial benefit.
Think about the other 80% of folks who purchased new cars instead of leasing. For long-term ownership, it almost always makes sense to purchase a car. Even if it takes years of loan payments to finally own it outright, you’ll save a lot more money in the long run.
Other Options for Getting a Car
Here’s the harsh reality: Cars are money pits, no matter how you acquire them. Renting, leasing, owning, or even borrowing someone’s car… it all takes money out of your pocket that could have otherwise been spent on fun things in life.
The key to figuring out which car-buying method is best for you depends on your financial circumstances and lifestyle preferences. Here are some other ways you might want to look at getting a car…
Buying a car outright if you can
If you can afford to purchase a car with cash, this is probably the best option. Buying a car outright helps avoid monthly debt obligations, and makes the overall cost of ownership cheaper. With a loan, you’ll pay interest, which makes the purchase even more expensive than it already is.
We’re not suggesting you pull $90k out of your retirement savings and blow it on a new Maserati because you can. Parting with your hard-earned cash should be a carefully considered decision.
New vs. used cars:
We almost always recommend people purchase used, low-mileage vehicles. It makes the most financial sense, especially for younger folks still in the wealth-building stage of life.
New cars take a HUGE depreciation hit within the first few years of ownership. Typically a new car will lose about 20% of its value in the first year after purchase, followed by about 15% further depreciation each year over the next few years until it’s four or five years old.
Instead, let someone else take that hit for you and purchase a used car with cash. Although the average cost of used cars is now a whopping $26,510, you can still find incredibly reliable cars for under $5,000 if you’re willing to put the time in to look for them.
Financing a car
In some situations when you don’t have enough cash saved (and also cannot delay a purchase), it could make sense to get a car loan. For example, if your car breaks down and it would cost more to repair it than it’s worth, and you must use your vehicle to get to work, financing could be a decent option.
When you finance a car, you get a loan from the bank, a dealership, or a credit union. Credit unions are one of the best places to turn to when financing a car. They are known for their low rates and good customer service. DO NOT just walk into a dealership and accept their financing – always shop around before and after visiting a dealership.
Once you pay off your car loan, you’ll fully own your car and no longer have a monthly payment. Shorter loans are better if you can afford the higher monthly payments. Less interest = less overall cost of ownership. If you have good credit, you can potentially qualify for lower interest rates.
Remember you’ll still need to put a down payment when financing a car. Usually, putting down at least 20% can help you to get the best rates. The more money you can afford to put down, the better.
Remember not to finance more than you can afford to pay off over a 4 year loan period. If you can’t make that work, you should be looking at less expensive cars. Ideally, you’ll want to keep your loan payment to less than 10% of your monthly income.
The Bottom Line:
Despite it not being the most financially savvy option, leasing a car could make sense for some folks. If you want to drive the newest vehicles with the latest tech and safety features and don’t drive too many miles, leasing a car could be a reasonable option. Just be sure to not overextend yourself financially. And do the math to make sure you won’t end up over the mileage limit.
But if your main objective is to spend less money overall (we strongly encourage this!), leasing likely won’t be the right option for you. If you are behind on your retirement savings, or struggling financially in any way, buying a cheap used car trumps leasing a new one every time.
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